Now that summer is all but behind us, it will be interesting to see whether the market volatility we've seen over the past month will continue. As of Friday, the S&P 500 experienced 12 "volatile" days (defined as days the index was up or down more than 1%) out of the past 24, dating back to July 31st. I know that I am beating a dead horse with this particular statistic, one that I've become somewhat obsessed with, but it can be quite telling, if nothing else, about the lack of market efficiency.
For perspective, last year, there were no volatile days between June 25th and October 9th. Then, we had a run of 28 in the 53 trading days between October 10th and December 26th, in what became a very challenging fourth quarter, in which the S&P 500 dropped 14%.
With all of the wackiness in the bond markets, the 2020 election in sight, and gold at a six-plus year high (not a cause, but a symptom), among other things, I expect the recent volatility to continue. It's a good time to have some dry powder on hand.
On another note, construction name Tutor Perini (TPC) has emerged as the largest net/net (company trading below net current asset value) that I've seen in years. Currently trading at 0.8x net current asset value, the $500 million market cap company has had a rough year. Shares have been cut in half since May, as a result of two consecutive earnings misses. Second quarter results were particularly bad. TPC missed consensus estimates by 29 cents (+18 cents versus 47 cents). The company also cut full-year guidance from $2.00-$2.30 per share, to $1.60-$1.80.
Companies often become net/nets, trading a very low multiple of net current asset value, for very good reasons. The question for net/net buyers is whether a given company has some life left, and whether current valuations represent more punishment than is deserved. It is certainly not for everyone, while it can be rewarding, the market is not always wrong in these cases. If you buy a net/net, you are betting that the market does not get it.
For its part, TPC is a mini-favorite of short sellers, currently having about 24% of shares sold short. That raises the possibility of a short squeeze at some point, but future quarterly results will tell that tale. TPC currently trades at less than 4.5x next year's consensus estimates, so expectations are very low at this point, and last quarter's bad results are still weighing heavily on the market's perception of the name. The company is expected to report Q3 results in early November, with the current consensus estimate calling for revenue of $1.29 billion, and earnings per share of 59 cents.
TPC currently trades at just 0.41x tangible book value per share, and ended last quarter with $150 million in cash, and $956 million in debt, which is a concern. If there was any good news from last quarter, it was the company's backlog was $11.4 billion, up from $8.7 billion the prior quarter.
Net/nets can be an ugly business, value investing's version of "dumpster diving" and TPC is a classic case. Where she goes from here no one knows. While intrigued by the situation, I won't go beyond putting the name on my watch list for now. Distressed "value" continues to get hammered in this market environment, and if you really want to own something in that category, you may get it cheaper tomorrow, next week, next month, or beyond.